Disruptive Innovation in the Legal Industry

By Jimoh Ovbiagele
on January 13, 2017
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“Disruptive innovation” is one of those phrases that you hear a lot, but few people seem to know its true meaning. I’m guilty of this myself. Disruptive innovation is a theory by Clay Christensen, a professor at Harvard Business School, that was popularized in his book Innovator’s Dilemma. It explains why time and time again, incumbents in a market with considerable resources and intellectual leaders fail to catch on to disruptive market shifts. This theory is poignant today as the legal industry is embroiled in fierce competition.

To understand why companies fail, you must understand why they succeed. For this article, we will consider law firms as companies. Successful companies beat their competition by mastering client service. They create value for groups of consumers who in turn, pay them money. As companies find continued success, they increase their revenue by going upmarket, where they can find higher margins, by creating more sophisticated services and goods for their biggest customers. However, while rationally attending to their most prized-customers, these companies begin to neglect consumers who cannot afford their service; or over-serve their customers who would prefer a cheaper, more basic one.

This creates an opening for new entrants into the market. “Disruptive innovations,” under Christensen’s definition, make services more accessible to a wider audience. Such innovations are typically inferior by most measures, but they do the job, and their price is right for the neglected consumers. Entrants use these consumers as a foothold into the market. Here is where incumbents make their first mistake: they ignore the entrant’s arrival because the newcomers’ usually have lower margins and are in smaller markets. This creates a vacuum for entrants to go upmarket and chase higher margins, by honing their services on what is called a “disruptive trajectory.” Eventually, this path leads the entrants to the door steps of the incumbent’s customers, waking the sleeping giants. The now-alert incumbents try to retaliate, but it is too late. The entrants have too much momentum and improved services, and the incumbents are doomed.

Xerox was a quintessential example of a sleeping giant. As the once-dominant player in the photocopier market, Xerox sold large, expensive photocopiers to businesses. Xerox, over time, developed new, more expensive copiers that could print a high amount of pages per second and cost less per page to print. However, these copiers were not practical for individual consumers. A gap in the market formed. Canon seized upon this market opportunity by launching a low-price, personal photocopier that printed fewer pages per second and cost more to print per page. The copier took off, but Xerox ignored Canons’ early successes, to its ultimate detriment. The market for personal photocopiers eventually dwarfed the business market; with Canon emerging as the winner. If Xerox had been proactive, it could have indeed taken this market for itself.

But what of the legal industry? It is widely acknowledged that big law firms dominate the market. Over the years, they have been refining their services to meet the growing complexity of their clients’ needs by cultivating deeper expertise in their lawyers, and expanding their core competencies by merging with other firms. These actions drive rates upwards, pricing out a large portion of consumers—80% of Americans who need legal services cannot afford them—and over-serving clients who would be satisfied with a simpler solution.

In this wake, services such as Legal Zoom, who provides essential legal documents online, have emerged. Few big law firms view Legal Zoom as a threat, because its service is simple and that market is less profitable. However, the global employment and labor firm Littler Mendelson has recognized that many of its clients desire low-cost solutions. Littler released an online service called CaseSmart to help manage employers’ discrimination claims and complaints. CaseSmart also provides access to low-cost lawyers, who leverage advanced technology and optimized processes. CaseSmart’s revenue doubled from 2014 to 2015, but no competitors have responded, for the same reason Xerox did not respond to Canon.

In the past four years, significant technological breakthroughs in artificial intelligence (A.I.) have emerged. Most major technology companies such as Google, IBM, Microsoft and Amazon are investing billions of dollars in A.I. My co-founders and I founded ROSS Intelligence in 2014 at the University of Toronto, the birthplace of the A.I. Renaissance, to bring the power of A.I. to the legal industry. We hired A.I. engineers from world-class research labs and companies such as Google to build ROSS, an A.I. system that can research and answer questions about case law posed by lawyers in plain English.

For example, users can ask ROSS, “In New York, is the filing of a bankruptcy petition solely for the purpose of restructuring a lease or rejecting a lease a bad faith filing after 2008?” At ROSS, our research has found that a growing number of small to mid-size law firms are offering fixed-fee services to clients instead of ambiguous, unpredictable hourly pricing, using legal A.I. systems to streamline their delivery. We, as well as many other industry professionals, believe that the adoption of A.I. will only continue to grow. The development of incubators and think tanks that provide guidance and funding to startups within the A.I. realm are evidence of this change. In 2015, Dentons, the world’s largest law firm, spun out Nextlaw Labs, an independent subsidiary to explore new means to deliver legal services driven by technology after sensing rumblings of coming disruptive shifts in the industry. Nextlaw Labs was among the first investors in ROSS Intelligence.

In summation, disruptive innovations are innovations that provide greater access to a service that was previously only accessible to consumers with a lot of money. Incumbents typically respond too late, because they are too focused on squeezing profits from their biggest customers. Big Law has historically neglected and over-priced a large portion of legal service consumers, which has given rise to disruptors like Legal Zoom and Littler Mendelson’s CaseSmart, who are using technology to streamline the delivery of legal services.

In Greek mythology, Sirens were dangerous creatures, who lured sailors with their enchanting songs to shipwreck on the rocky coast of their island. Odysseus, the hero of the famous epic poem, The Odyssey, ordered all his sailors to plug their ears with wax and tie him up to the mast as their ship sailed by so that he could hear their songs’ fabled beauty. I believe big law firms can learn a lesson from Odysseus: you must be mindful when chasing alluring profits, lest you shipwreck yourself. Small law firms should take a lesson from the well-known story of David and Goliath: if you have a slingshot, a small rock, and the right angle, you can disrupt a giant.

About the Author

Jimoh Ovbiagele is co-founder and CTO of ROSS Intelligence, a provider of artificial intelligence-driven legal research services. He can be reached at jimoh@rossintelligence.com